Research Handbooks in Law and Economics series
Edited by Daniel Schwarcz and Peter Siegelman
Chapter 6: Catastrophe insurance
Catastrophe insurance is a generic term applied to a range of insurance lines with the common feature that claims are likely to be highly correlated across individual policies. The most common examples are natural disasters (earthquakes, floods, wind damage), terrorism, and financial guarantees (against losses on mortgage loans, municipal bonds, and credit default swaps). The term is also sometimes applied to coverage for large industrial accidents where the underlying risks are also low probability, but high consequence, events. Figure 6.1 shows the aggregate losses annually from natural catastrophes world-wide from 1980 to 2012. The dollar amounts are large and an upward trend in the overall losses is apparent. Table 6.1 provides details in terms of the ten costliest natural catastrophes since 1980. Neither data set, however, includes losses from either financial catastrophes or terrorist attacks. With regard to financial catastrophes, Jaffee (2011) places an upward bound of $1 trillion on the loss in market value on subprime mortgages that defaulted during the US subprime crisis. For terrorism losses, Hartwig (2011) estimates the total economic losses from the 9/11 attacks to be as high as $200 billion.
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